The Lloyds (LSE:LLOY) share price has been on a good run this year. Like many businesses, the bank stock’s price collapsed at the start of the pandemic. And to make matters worse, the Bank of England introduced new restrictions that prevented this popular income stock from paying dividends.
But now that lockdown restrictions in the UK are over, the group has started seeing the money roll in again, and the dividend ban has been lifted. So, I’m not surprised to see the Lloyds share price up by around 60% over the last 12 months. However, its new growth strategy has raised some concerns that could seriously impact the stock over the long term. Let’s take a closer look at what’s going on.
New growth opportunity in a low interest rate environment
Despite fears of rising inflation, the Bank of England and other central banking systems do not intend to raise interest rates any time soon. Low interest rates make the cost of debt for businesses and individuals more affordable. But given that Lloyds generates most of its income by charging interest on loans, it creates a challenging environment for the bank to thrive in. So a new growth solution is required.
The demand for rental properties in the UK is currently at an all-time high. Therefore, the management team has pursued a new venture with Barratt Developments to enter the corporate landlord market. The plan is to buy 50,000 properties over the next 10 years to rent them out. And with estimates indicating the first 10,000 homes will generate an annual pre-tax profit of £300m, this seems like a prudent move in my eyes.
Assuming the forecast is accurate, this venture represents a potential £1.5bn growth opportunity. Compared to the latest profit figures, this is a 20% boost from a single income stream. That’s pretty impressive for a bank stock, in my opinion. And it could lead to a meteoric rise in both the Lloyds share price and its dividends.
Risks to consider
As exciting as the prospect of growth can be, it’s hardly guaranteed. Home prices are now higher than before the 2008 financial crisis. And many analysts are becoming concerned about another market crash. The renowned economist Fred Harrison, who accurately predicted the housing crashes of 1990, and 2008, has already announced his prediction of another collapse by 2026.
If these doomsday forecasts are accurate, then Lloyds’ foray into becoming a corporate landlord could backfire, significantly impacting its share price and dividends. And given a large amount of the firm’s interest income comes from mortgages, the adverse effects would likely spread into its primary profit source.
So, where is the Lloyds share price going?
Today, it seems the Lloyds share price and its dividend policy are on track to return to pre-pandemic levels. And ignoring the risks of another housing crisis, its long-term growth prospects look promising. But the growing dependence on the price of houses as a driver of profits does raise some yellow flags in my mind. And so for now, I’ll be keeping it on my watch list.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.